National Income & Its Related Concepts

1 Mark Questions

1. Give one example of 'externality' which reduces welfare of the people. (Delhi 2013)

Ans. When the activities of one result in harm to others with no payment made for the harm done, such activities are called negative externalities, e.g. factories produce goods but at the same time creates water and air pollution. Production of goods increases welfare but at the same time pollution reduces the welfare

2. What is Nominal Gross Domestic Product? (Delhi 2011)

Ans. Nominal Gross Domestic Product refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the current year prices. It is also called GDP at current price.

3. What is meant by Real Gross Domestic Product? (Delhi 2011 c)

Ans. Real Gross Domestic Product refers to market value of the final goods and services produced within the domestic territory of a country during a financial year, as estimated using the base year prices. It is also called GDP at constant price.

1. Define domestic product. (All India 2011,2010)

Ans. The value of all factor incomes generated during an accounting year within the domestic territory of a country is termed as domestic product or domestic income of a country.

5. What is transfer payment? (All India 2011)

Ans. Transfer payments are all those unilateral payments corresponding to which there is no value addition in the economy, e.g. gifts, donations, etc.

3 Mark Questions

1. Define externalities. Give an example of negative externality. What is its impact on welfare? (Delhi 2014)

Ans. Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid.

Examples of negative externalities are:

1. River pollution created by an oil refinery has disastrous effects on aquatic life.
2. It reduces the overall welfare of the society and creates negative externality.

7. What are externalities? Give an example of a positive externality and its impact on welfare of the people. (All India 2014)

Ans. Externalities refer to the benefits or harms a firm or an individual causes to another for which they are not paid. These externalities can be positive as well as negative. A positive externality exists when an individual or firm making a decision does not receive the full benefit of the decision, e.g. Immunisation prevents an individual from getting a disease, but has the positive effect of the individual not being able to spread the disease to other. It enhances the overall welfare of the society and creates positive externalities.

8. Explain how 'non-monetary exchanges' are a limitation in taking domestic product as an index of welfare? (Foreign 2014; All India 2011)

Ans. The non-monetary exchanges which take place in the informal sectors are not included in the calculation of GDP since money is not being used. For example, Service of a housewife, kitchen gardening, etc. This results in an under estimation of GDP. Hence, GDP calculated in the standard manner may not give us a clear indication of the productive activity and actual welfare of the country.

9. Calculate Gross National Disposable Income from the following data (All India 2013)

S.No. Contents ₹ (in lakhs)

1. Net Domestic Product at Factor Cost 3000
2. Indirect Taxes 300
3. Net Current Transfers From Rest of the World 250
4. Current Transfers From Government 100
5. Net Factor Income to Abroad 150
6. Consumption of Fixed Capital 200
7. Subsidies 100

Ans. Gross National Disposable Income (GNDI) = Net Domestic Product at Factor Cost <math>(NDP_{FC})</math>